Fed Rule Lets Banks Gather Personal Data to Spot Bias

Fed Rule Lets Banks Gather Personal Data to Spot Bias

Article excerpt

A new rule approved by the Federal Reserve Board on Wednesday lets banks collect information such as borrowers' race, gender, and national origin in order to test their compliance with the Equal Credit Opportunity Act.

Lenders are already required to collect information on the race, gender, and ethnicity of mortgage applicants under the Home Mortgage Disclosure Act. The new rule applies to other types of loans, such as small-business, credit card, and other consumer loans.

The move marks a change in the Fed's implementation of the 29-year-old Equal Credit Opportunity Act. Until Wednesday banks had been required to comply with nondiscrimination rules but had not been allowed to collect the data they needed to verify compliance. Fed Governor Edward M. Gramlich on Wednesday likened that situation to asking athletes "to train for the Olympics but not giving them a stopwatch."

The new rule states that such information must be kept separate from the loan application and cannot be used in deciding whether to extend credit. The information will also be considered "privileged," meaning that the bank will not have to disclose it.

Privileged status is contingent on the bank meeting certain requirements. For instance, a bank that discovers an Equal Credit Opportunity violation but fails to take steps to correct it would lose that protection. So would banks that collect the information but fail to use it in such a self-test.